Why Apple’s Solid-Gold Watch Represents Good Strategy

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Apple (NASDAQ:AAPL) is offering a solid gold version of its upcoming Apple Watch, dubbed the Apple Watch Edition, that will be priced at upwards of $10,000 apiece. While some niche companies have offered consumer electronics wrapped in precious materials in the past, the fact Apple is following the strategy is interesting. Luxury goods and high-end watches are generally known to hold up their value over time. This doesn’t appear to be the case with Apple’s gold watch, given that it includes electronics (touch screens, sensors and processors) that will likely be outdated within a few years. So what is the thinking behind the Apple Watch Edition, and what is its role in Apple’s broader Watch strategy? Firstly, a high-end watch could help Apple improve the positioning of its entire watch lineup. Secondly, the device could find takers in China – which is a huge focus market for Apple. Additionally, the Edition could help the company bring in some easy profits.

We have a $128 price estimate for Apple, which translates to a market cap of $740 billion. Our price estimate is about in line with the current market price.

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Increasing Aspirational Value Of Apple Watch

The Apple Watch is not as revolutionary a product as some of Apple’s biggest successes such as the iPod and the iPhone. The device doesn’t currently have a “killer” application, and the utility that it offers over a smartphone appears to be marginal, effectively making it a something of a luxury rather than a must-have device targeted at the mainstream customer.  Apple’s pricing of Apple Watch Sport (starting at $349) and Apple Watch (starting at $549) also indicates that the company is positioning the device at a premium. The Watch Edition could serve to reinforce the luxury cachet of the Apple Watch franchise.

Combination Of Apple Brand, Gold Will Sell In China

China is a major focus market for the Apple Watch. Apple has been promoting the watch in the country for some time now and the device will go on sale the same day (April 24) as in the U.S., unlike most other Apple products which typically see a delayed launch in China.  We believe that the high-end Apple Watch could find takers in China given the country’s large appetite for gold and jewelry. Apple has been increasingly catering to the tastes of Chinese customers by offering gold colored iPhones and iPads (the upcoming MacBooks also offer a gold as a color option). Unlike in markets such as Europe and North America, where Apple is viewed as a mainstream consumer brand, the company does command a certain luxury cachet in the Chinese market and interest in the company’s products among China’s growing elite remains high. For instance, the company took the top spot in the luxury gift market during 2014, overtaking Hermes, according to the Hurun Chinese Luxury Consumer Survey. This positioning could help Apple move a meaningful number of high-end watches in China.

Easy Profits for Apple

The gold case on the larger Apple Watch Edition weighs 69 grams, while the smaller case comes in at 54 grams, according to Apple. The actual amount of gold that Apple is likely to put into manufacturing the case is likely to be less, but assuming an average weight of 61 grams, this would translate to a price of about $1,800 per case at current prices for 18-karat gold. Assuming that the electronics, bands, manufacturing (the second largest cost bucket for the device, by our estimates) and bundled accessories together cost another $600, this would bring the total bill of materials to about $2,400. This implies gross margins of over 75% assuming a price of $10,000 apiece. If Apple sells 30,000 units of the Watch Edition during the first year, this would translate to gross profits of over $220 million. While this seems trivial in the context of the company’s overall gross profits (about $70 billion for FY 2014), it does translate into some relatively easy profits for the company. [1]

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Notes:
  1. Apple Form 10-K []